Open Banking Opportunities and Challenges

open banking

Last modified on May 10th, 2024

Imagine if your bank could, based on the data, intuitively tell what products you might actually need, instead of spamming you with offers from loans to savings accounts and everything in between. Open banking offers financial institutions, businesses, and customers plenty of opportunities as technology advances. However, there are still some concerns about the security of the data, which we will share more about in today’s piece.

What is open banking?

Open banking is the integration of banks with third-party services (fintechs) to promote data sharing and better financial services. Budgeting apps, for example, enable customers to better calculate their incomings and outgoings, set savings goals, and reach their targets faster.

It’s not about allowing banks to sell their data, but instead ensuring that information is available between financial providers to make the lives of consumers easier. It must be all done securely and with the consent of the customer. Data security will protect the integrity and privacy of information, both when it’s in transit and storage.

Due to the ability to link accounts and connect services, it provides many customer benefits. It’s the convenience that provides an advantage.

Let’s take the example of applying for funding as a business. Filling out all of the information manually can take around 40 minutes, and that’s if you already have the documents and financial statements to back up your claims. But by using an open banking provider, this account information can be automatically pulled into the application, and the user simply has to scan it and double check everything is correct.


How does open banking work?

It works through a technology called application programming interfaces, or APIs. These programs are built by the banks and work as a set of instructions for businesses on how to access the banks data securely. In most cases, the contents of an API are pre-agreed by the government, regulators and the banks themselves.

There are three types of APIs used in open banking:

  1. Data API: sharing account holder information, names, locations etc
  2. Transaction API: initiate payments or collect transaction and categorization dat
  3. Product API: provide personalized product recommendations for consumers based on purchase history and need

Ultimately, open banking is about innovating the financial world and APIs allow businesses to leverage the data in order to build a better customer experience.


Who takes part in open banking?

The major players in the ecosystem are:

  • The banks: the original, traditional data collectors, these organizations hold the keys to open banking
  • The regulators: the rule-makers that aim to preserve the integrity of open banking and ultimately protect the customer (in line with the fraud act). In the EU, open banking is possible thanks to the PSD2 regulation.
  • The third party service providers: the innovators who’ll use banking data to create better digital products, services and apps
  • The customer: the end-user who must consent to the data sharing in order to reap the benefits of open banking

There are surprisingly many players in this ecosystem. In the US, the ecosystem is industry-led – meaning that the banks are the players making decisions for the direction of the technology. This operates in direct contrast to the UK and EU markets, where the regulators get final say on who can participate, and what they can access. For example, the “big 9” regulation in the UK only mandates that the largest nine incumbent banks, and their products, are bound by open banking payment regulations.


What are the advantages of open banking?

Open banking is a positive innovation in the finance sector, but here are some of the biggest benefits:

  • Data driven decisions
  • Optimized processes
  • Fast market penetration

Data-driven decisions

Thanks to the easy access of financial data, both banks and third party fintech providers can make more targeted decisions.

For example, Little Birdie specializes in finding all of a customer’s subscriptions and highlighting them to the customer. With many of us making payments for subscriptions we don’t use, making this information available allows the consumer to cancel the subscription accounts they don’t need. Even better, the aggregator enables customers to automatically complete this, for free, online in their platform (without any customer service calls).

Moreover, the access to open banking data contributes to a reduction in mis-selling. For example, Consumer Duty is a regulation that requires financial institutions to justify why they are making product offers to their customers. With open banking data, companies can determine which of their customers have previously applied for a business loan, for example, and then make a business credit card offer for long-term financing.

Optimized processes

With integrations, open banking makes it easy for banks and businesses to optimize their processes.

For example, businesses can use APIs to automate the reconciliation of their invoices. With a program to search through transaction data from the bank, invoice data can automatically be matched to bank outgoings. Not only transaction amounts, open banking also allows account names to be matched to vendor names, effectively ‘double checking’ the invoice payments.

Of course, that’s only one example of the optimization benefits of open banking that gives institutions more internal control. But by harnessing the efficiency of this technology, businesses don’t just gain operational agility. They’ll also notice cost savings as the price of both manual workloads and their errors is decreased.

Fast market penetration

For third party service providers, one of the major benefits to this ecosystem is instant credibility. In the traditional fintech world, no amount of innovation can bypass the time and effort required to grow a customer base. In fact, this can be a costly practice, as brands aim to build their awareness, convert followers to customers, and be found online.

But in open banking, aligning with the APIs of big banking institutions enables third parties to leverage their already-established customers. This reduces the barrier to access, and enables new businesses to gain market credibility quickly. It may also save on some of the marketing costs that businesses traditionally have to absorb as they seek to build brand awareness. For example, open banking company Bud has gained much credibility through partnering with established banks like Aviva.


What are the challenges?

Likewise, there are some key challenges to consider before you dive head first into the open banking ecosystem:

  • Inconsistent service quality
  • Hidden costs
  • Questions over how secure and private the data is

Inconsistent service quality

Without the right regulation, any old Joe can essentially use the APIs to build their own app or service that utilizes open banking data. And that leaves the door wide open for inconsistencies in service quality, security and general usability too.

For example, one business platform could have all the bells and whistles, offer round-the-clock customer support and elevate its user experience to provide brilliant service quality. Another could simply meet its regulatory requirements, as that is all that is required to be on the market.

With inconsistent service quality, customers could be put off by the overall concept of open banking. So players need to do their own due diligence in order not to limit their participation.

Hidden costs

Unfortunately, it costs financial institutions more to manage transactions through open banking than through traditional options. These costs may be passed onto the third parties, or to the customers themselves. And they’re not such an attractive prospect, no matter what the technology can do.

Moreover, the cost of incumbent organizations migrating over to open banking is very high. But the alternatives are much worse – with banks at high risk of being left behind if they can’t integrate with the service providers that customers need in time.

Therefore, it’s up to institutions to find the best and most efficient way to move their transactions into the open banking system, and potentially absorb the short-term costs in order to gain a long-term advantage.

Security vulnerabilities

When open banking was first introduced, the industry-wide reaction was anxiety around the security of the data. In regulatory-driven ecosystems, such as the European and British regulations, these concerns have subsided pretty quickly. It’s easy to see just how secure the data really is, since the highest standards are mandated for both banks and third party providers.

However in the US, an industry-driven open banking ecosystem still highlights those security concerns. For example, money laundering, while harder to do digitally, may be possible if fraudsters can get around the ID verification requirements of open banking.

In order to get around this challenge, businesses should ensure they meet their regulatory requirements and use best-in-class software security protocols.

For example, Trustpair to protect against payment fraud. Our solution provides ongoing account validation to make sure you’re always paying the right beneficiary. Request a demo to learn more!

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To recap

Open banking is all about making financial data accessible to elevate the services and experience for customers. It works through APIs, and can benefit banks, third parties and customers with data-driven decisions and growth. But there are some security concerns around open banking, and players should solve this problem first.

Advantages Disadvantages
Data-driven decisions

Reduced mis-selling

Optimized processes

Reduction in costs

Fast market penetration

Instant credibility and access to customers

Inconsistent service quality

Hidden costs

Security vulnerabilities


The concept of open banking relies on the flowing of data. It enables providers to access transaction data to make better decisions, more targeted offers and get higher conversion rates. Moreover, open banking is a fintech service that truly benefits the customer, by offering higher convenience when it comes to ID verification and connecting accounts.

Yes, open banking is legal in the US. In fact, it’s growing in popularity. But before creating open banking APIs, service providers must take note of the regulation.

Manage the risks related to corporate treasury.

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